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In her response to my critique of her earlier column on employer- vs. government-sponsored health insurance, Sally Pipes uses one of the all-time favored debating tricks: namely, the bridge. Using that tactic, one tries to change the focus of the debate to another, preferred focus. Nice try, but I will not fall for it.

In her current response, Ms. Pipes argues that “No, Really—Employer Health Insurance Is Better Than Government Care.” (Italics added.) Her earlier column argued that employer-sponsored health insurance is cheaper than government-sponsored health care.

These are two different topics entirely. And even on “better” one could have lively debate. One might ask low-income persons, for example, whether they would rather have Medicaid coverage or an employer-sponsored policy with high deductibles and sundry upper limits on coverage. After all, employer-sponsored coverage includes a huge array of different degrees of coverage.”

With respect to “cheaper,” the focus of my critique, Ms. Pipes had written in her earlier post that

Employers are spending much less per person than is the government—about 60 percent less, concludes a new study from the American Health Policy Institute…The AHPI study found that employers spent $3,430 on health care per person in 2012. By contrast, government programs spent $9,130…Encouraging the expansion of employer-sponsored insurance would therefore seem to be more cost-effective than handing out government coverage to more people.

The thrust of my critique was that the numbers Ms. Pipes offers in this quote are basically meaningless, because the populations covered by government-sponsored programs is not comparable to that covered by employer-sponsored coverage. To paraphrase country music star Collin Raye, that’s my critique and I’m sticking to it.

Ms. Pipes did note that the study she cites noted that the populations covered by government and private insurers are different. Fair enough. But then why would she offer the meaningless comparison I reproduce above?

In her new post Ms. Pipes informs us that Medicaid pays the providers of health care fees that are substantially lower than those paid under employment-sponsored coverage, a point I had explicitly noted in my critique of her earlier post in connection with the Urban Institute study. The study had found that covering young adults by private, employment based insurance would cost more than it costs under Medicaid, precisely because of the fee differentials.

It is well known among health policy analysts that this circumstance leads many American physicians to refuse treating Medicaid patients, but I do not think the same can be said for hospitals.

One can view the much lower fees paid providers of health care by Medicaid as an expression of the reluctance of Americans to be their poorer brothers and sisters keepers in health care. As I once put it to New Jersey State legislators: “You signal to New Jersey pediatricians that their time and skill is worth only a third or a quarter as much when applied to a poor child on Medicaid than when it is applied to your own children, and many pediatricians understand your signal and refuse to treat children covered by Medicaid, understandably so. Your signal is pretty strong and very clear.”

So if Ms. Pipes argues that Medicaid beneficiaries do not enjoy the same access to health care they would have if they had similar coverage under more expensive commercial health insurance, no one I think would argue with her. But that was not the topic before us in our exchange. If American taxpayers were willing to buy for the poor coverage very similar to what they now have under Medicaid, with the much higher fees paid to the providers of health care and thus higher cost, I certainly would not object.

As to the issue of cost shifting, that topic has been the focus of a decade-long debate among economists. Even within the profession there are different views, and the same economist, me included, may have changed thoughts on it over time. Here is where the problem lies.

Proponents of the cost-shift theory typically present visual displays showing an inverse relationship between the payment-to-cost ratios of government payers and private payers (see, e.g., Exhibit 3 here). These data, produced regularly also by the Medicare Payment Advisory Commission (MedPAC) in its annual March reports to Congress, give the theory enormous intuitive appeal even though, as noted in my earlier post, the MedPAC does not subscribe to the cost-shift theory.

But if one delves into the behavioral assumptions needed to make the theory work, many economists, myself included, eventually stumbled on the theory. Basically, the theory assumes that whatever a hospital’s costs are, they are somehow thrust upon the hospital – perhaps that they are God given. All payers collectively must then “reimburse” (as the jargon still goes in the hospital industry) hospitals for these costs that are presumably out of their control. So if one payer welches and pays less than full costs (including allocated overhead), other payers must step up to the cashier’s window and make up the shortfall. In health care, these other payers are commercial insurers and self-paying patients.

The cost-shift theory also implies that, in negotiating with payers on prices, hospitals routinely leave money on the table by charging lower prices than they could have. They then are seen to claw back what they left on the table if some powerful payer—government or a large private insurer—cuts payments to the hospital.

Thus put, it is clear why many economists have trouble with this theory, because they are just not comfortable with the behavioral assumptions underlying the model. It leaves the model so—how shall I put it—sociological.

Instead, economists offer a different theory, namely, that what we see in health care is just old-fashioned, standard price discrimination that is practiced by any seller who can (a) segment the market by customers with different price sensitivities, because products cannot be resold among customers and (b) who has high operating leverage, meaning that incremental costs in the short run are low relative to allocated unit fixed costs. Drug companies are in this situation, hotels are, and airlines are. Yet we do not talk about cost shifting by, say, hotels or airlines. Has anyone ever “reimbursed” a hotel for a night’s stay?

The behavioral assumptions underlying the price-discrimination model are simple and more easily digested by economists. One merely needs to assume that at any time, in negotiating over prices, sellers—here, say, hospitals—try to extract from their set of customers the maximum revenue that can possibly be extracted from them. Less can be extracted from payers with considerable market power relative to providers and more from relatively weaker payers: in the case of hospitals, possibly anxious self-paying middle and upper-middle class patients (e.g., owners of start-ups or small businesses).